Markets Rebound, but May Not Be Sustainable: A Quarterly Market Update in 6 Charts

Our first-quarter 2019 review of global market trends

May 01, 2019

Brian Deignan

U.S. stock markets experienced a strong rebound in the first
quarter of 2019, following the previous quarter’s correction; however,
the global impact of the turnaround has been weaker.

Every quarter, Morningstar’s quantitative research team reviews the
most recent global market trends in finance and evaluates the
performance of individual asset classes. The findings are then shared
in the Morningstar Markets Observer, a
publication that draws on quantitative analysts’ careful research and
market insights.

Below, see some of the chief findings from this quarter’s review.

6 trends from the latest quarterly market update:

Expectations for major policy rates declined. In
first-quarter 2019, the Fed, the European Central Bank, and the Bank
of England all lowered their market expectations for the path of
policy rates (shown on the chart below). The three central banks
revised down their growth forecasts, though they noted that upside
inflation risks have recently softened. The Fed and ECB policymakers
also explicitly lowered their guidance on the likely path of
monetary policy: Neither institution’s forecast includes
expectations of rate increases in 2019, and implied rates on futures
contracts show rate increases are also unlikely in 2020. Source:
Federal Reserve, European Central Bank.

Global trade may be nearing the trough. Though the
outlook for global trade remains gloomy, there are indicators that
the pace of slowdown may be moderating. As the chart below
illustrates, Chinese manufacturers’ export orders showed signs of
bottoming in first-quarter 2019. And while U.S. and German exporters
have continued to see a drop in new orders, their overall pace
remains near the averages set in the aftermath of the 2008-09
financial crisis. However, the future of these numbers is subject to
how U.S.-China trade tensions play out. Source:
Institute for Supply Management, Institute for Economic Research,
China Federation of Logistics & Purchasing.

U.S. retail sales decline, though elevated sentiment and a
strong labor market indicate a coming rebound. As shown
below, late 2018 and early 2019 saw U.S. retail-sales growth plunge
to its slowest pace since 2014, which aligns with the overall
economic slowdown in those quarters. Nonetheless, a strong labor
market and easing financial conditions have led to an overall
favorable macroeconomic environment. Similarly, U.S. consumer
sentiment remains elevated around 96, which suggests a bounceback in
household spending may be on the horizon.Source: U.S.
Department of Commerce, University of Michigan.

Continued decline in costs. Multiple
factors have contributed to overall falling costs, such as fund
companies lowering expenses on existing funds, high-cost funds
leaving the market, assets shifting to lower-cost funds, and newer,
lower-cost funds entering the market. As shown below, although
asset-weighted expenses for both equity and fixed-income funds have
fallen nearly 30 basis points since 1994, costs have been declining
because the expense ratios of individual funds have hovered around
zero since then.Source:
Morningstar Direct.

Funds with below-average assets saw the most launches, while
above average saw the most closures. As shown below,
funds with lower-than-average assets accounted for most of the
year’s launches: 382 out of 1,049. Alternatively, fund closures saw
a more even spread across asset sizes, though funds with average,
above average, and high assets contributed to the lion’s share of
closures.Source:
Morningstar Direct.

Overall, though the rebound of U.S. stock markets has led to a
substantial lift for equity markets, the economic data remains
mixed. This leaves continued uncertainty as to whether the upswing is
backed by real economic growth.

To see the full analysis, download the latest
Morningstar Markets Observer.

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